1 Company Leaping the Competition

Source: STAG Industrial.

STAG is the acronym for Single Tenant Acquisition Group -- the name of a REIT executing a unique strategy that pays investors a high dividend yield while growing at a faster rate than any of its peers. 

STAG Industrial  (NYSE: STAG  ) is an $854 million industrial REIT that has only been publicly traded since April 2011. It is not nearly as large as $1.6 billion First Industrial Realty Trust (NYSE: FR  ) , or $1.9 billion DCT Industrial (NYSE: DCT  ) , and is absolutely dwarfed by $17 billion Prologis  (NYSE: PLD  ) . However, STAG is outperforming these larger established industrial REITs. 

Here are two charts that tell the story:

STAG Enterprise Value Chart

Growing fast
In just over two years since becoming a publicly traded REIT, STAG has grown its portfolio from 91 properties containing 14 million square feet of industrial space to 194 properties containing over 33 million square feet as of June 30, 2013. During the first six months of 2013 STAG acquired 23 industrial facilities containing four million square feet -- almost 14% growth in just half a year! 

STAG Dividend Yield (TTM) Chart

Dividend giant
STAG Industrial announced on Aug 12, 2013 that it was raising its quarterly dividend on common shares from $0.27 per share to $0.30 per share -- an 11% increase. A yield in the 6% range is considerably more than its larger industrial cousins. In fact, it is at the upper range for the entire REIT sector. 

Why is STAG so successful?
STAG outpaces the crowd, mainly because it doesn't try to go up against the bigger industrial REITs. STAG has an entirely different strategy -- and is executing this strategy like clockwork. They do not develop new facilities; they acquire them.

In fact, STAG acquires Class B properties in secondary markets, typically in the $5 million to $25 million range. In order to appreciate how STAG differs, let's take a quick look at where the larger players in the industrial REIT space focus their operations.

Prologis takes a global view
Investing in Prologis would be a way for investors to leverage the "globalization" of supply chains.  It has 2,986 industrial properties under investment management in 21 countries located in the Americas, Europe, and Asia valued just under $23 billion -- properties are typically located near key seaports, airports, and major freeway interchanges.

If you count managed properties, the total Prologis platform is 563 million square feet, valued at $46 billion. Additionally, it has a global land bank of 10,730 acres for future development.  Prologis doesn't do anything in a small way.

Developing story
DCT Industrial is a very dynamic company in the process of rebalancing its real estate portfolio. It is focused on acquiring assets in targeted growth markets such as Los Angeles and the Inland Empire, Houston, Miami, New York/New Jersey, and Seattle. During the quarter ending June 30, 2013, DCT acquired 13 buildings for $157 million and sold 15 buildings for almost $52 million.

DCT Industrial management believes it can reward investors by building and leasing new modern industrial facilities. A dividend yield over 4% indicates that this plan is on course.

Building story
As of the second quarter, First Industrial Realty owns, manages and has about 67 million square feet of industrial space under development. First Industrial is also building its balance sheet with a stated goal "to return to investment grade." It is selectively buying and selling assets to help achieve this goal. First Industrial has targeted $75 million to $100 million in property sales for 2013. The company recently exited markets in Canada and Omaha, Nebraska.

First Industrial also recently acquired a vacant 509,000 square foot facility in Chicago. It's also developing large new projects located in Los Angeles and the Inland Empire, Central Pennsylvania, and Houston. 

The hot distribution markets
The Inland Empire handles about 75% of the goods imported through the ports of Los Angeles and Long Beach. In a recent article from The Wall Street Journal, a study indicated that of the 13.8 million square feet under construction, over 68% is speculative. 

Prologis, DCT Industrial and First Industrial are major competitors in this market place, each having developed significant tracts of land to construct huge, modern distribution warehouses. 

The WSJ article also points out that the widening of the Panama Canal -- scheduled for completion in 2015 -- would allow ships to bypass the ports of LA/Long Beach in the future. This will add another layer of risk for speculative development in the counties east of Los Angeles.

Predictably, STAG Industrial does not have a dog in this fight. STAG does not compete to develop Class A properties in primary markets, but it has been busy executing its acquisition strategy in secondary markets.

STAG Industrial's acquisition activity
In July, STAG Industrial acquired two buildings, one warehouse and distribution facility, and one light manufacturing facility -- containing a total of 250,100 square feet for approximately $10.8 million. These properties are located in Nashville, Tenn. and Tulsa, Okla.

In August, it acquired two warehouse and distribution facilities containing a total of 1.2 million square feet for approximately $53.7 million. These properties are located near Milwaukee, Wis. and Baltimore, Md.

The properties are 100% leased with a weighted average lease term remaining of over six years.

Investor takeaway
Focusing on secondary markets with very little competition is what allows STAG to grow so profitably. Since STAG has only been a public REIT for just over two years, it might be a little early in the game to crown them a growth and dividend superhero. However, there is no doubt that it is successfully executing a strategy that pays investors a handsome dividend to watch them grow. 

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Related Tickers

10/17/2014 4:03 PM
DCT $7.91 Up +0.10 +1.28%
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